What does reform mean for mortgages?

More supervision of lenders may be a good thing, but if it's too restrictive it could lead to fewer products.

The world financial crisis started with the mortgage market; so it's logical, when the Chancellor, George Osborne, announced his plans for reform of financial regulation, that greater supervision of home loans would be a central plank.

The idea is that with greater supervision of lender balance sheets by the new beefed-up Bank of England, under the governor, Mervyn King, never again will lenders be allowed to stretch their finances to breaking point in order to be able to lend more and more money.

In reality, if everything goes according to plan, top-of-the-market products such as Northern Rock's infamous 125 per cent Together mortgage and Bradford & Bingley's disastrous foray into buy-to-let should never be repeated. At least, that's the theory.

"Handing the powers to oversee lender balance sheets to the Bank of England makes sense because, under the old system, the Financial Services Authority faced a conflict of interest: it wanted to see responsible lending, but also wider consumer choice," Ray Boulger, technical manager at John Charcol, one of the UK's biggest brokers, says. "The FSA thought it could simply stand back and create consumer information, such as key facts documents, and trust borrowers to make the right decisions in terms of how much cash it is sensible to borrow. As we know, it didn't work," he adds.

However, the new system of the Bank overseeing lender balance sheets, while the new Consumer Protection Agency is charged with making sure the public are given a fair deal, could, according to some experts, tilt the balance towards ever more restrictive lending. "What mustn't happen is that we see arbitrary limits imposed such as a cap on the loan to value [LTV] lenders are allowed to offer or such tight criteria, dictated from upon high by the regulator, that means that the self-employed or those with variable incomes can't get a mortgage," James Cotton, mortgage specialist at mortgage broker London & Country, says.

These are concerns echoed by Mr Boulger: "We don't want innovation to be killed off by over-caution, particularly over LTVs. At present, the differential in cost and availability of mortgage products, if you have 10 or 30 per cent, is massive and that has to be addressed. We need more competitive higher LTV products, not fewer," he says.

Mr Boulger cites the example of Nationwide's negative equity mortgage as an example of a mortgage product that may not match the template for responsible lending, but is potentially a help. The Nationwide mortgage will lend up to 125 per cent of the property value but only for an existing customer in negative equity who wants to move house: "Sometimes borrowers, through no fault of their own, are placed in a poor situation and they need innovation to get out of it. It'd be unfortunate if plans for regulation of the mortgage market prevented lenders from being able to meet the genuine need of borrowers," says Steve Blore of Nationwide.

But a strict cap on LTVs is unlikely: "Labour rejected it and I can't honestly see a Conservative-led government going with such a restrictive idea. It is against free markets," Mr Boulger says. As for a potential cap on mortgage income multiples, Mr Cotton is sceptical this will happen: "Take the example of a trainee barrister or junior doctor. They may not be earning much today, but are very likely to be bringing in a big wage tomorrow. Should they have to wait to get on the property ladder?" Mr Cotton asks.

In last year's review of the mortgage market, the FSA banned self -certification loans and called for the imposition of affordability criteria. Mr Boulger suggests that, overall, the presence of a slightly more interventionist regulator, more focused on keeping lenders on the straight and narrow, may increase rather than reduce competition and the mortgages available: "If the money markets feel there is a fully functioning regulatory regime in place, then that may ease concerns about lending. This in turn could lead to an increase in the number of products available," Mr Boulger says.

"It's all about balance: how to ensure there is no repeat of the crisis while not choking the market and stopping consumers getting mortgages they can actually afford," Mr Cotton concludes.

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